Low income areas often prove attractive to first time investors because of their low cost of entry.  Investment properties in low-income areas can be purchased for well under $100,000 and typically provide a nice stream of investment cash flows.  Investors can use this strategy to build up a strong base of investment capital and improve the community in which they invest.

With few exceptions, low-income areas tend to experience little to no appreciation for several reasons.  First, investors in these areas expect low future rent growth.  Typically, tenants in these areas have limited disposable income making high rent increases on a regular basis unfeasible.  Second, investors expect limited neighborhood improvement.  Again, with very little disposable income retail demand tends to be lower.  Furthermore, major offices tend to locate in more affluent areas, so new developments generally do not occur in these neighborhoods.

So where is the value?  Tenants and property selection create value in these neighborhoods.  Investors should first understand that not all vacant buildings are created equal.  Finding a structurally sound building in need of cosmetic repairs yields the most value for an investor.  With a ceiling on rents and low appreciation expectation, heavy financial investments in property upgrades will not make sense.  However, cosmetic touches like new doors, paint, landscaping, carpeting, etc. can go a long way in increasing the value to the perspective tenant.

Tenant selection also creates value.  Quality tenants, who pay their rent every month and take care of the property, generate significant value in this type of an investment.  Remember, current rent and expected future rental growth drive value in real estate.  Selecting the right tenant not only locks in current rent, but increases the expected future rental growth. 

Tenant selection is as much about the tenant as it is about the landlord.  Tenants will care as much about a property as a landlord cares about them.  If landlords are slow to respond to their needs or generally treat them poorly, tenants will be slower to pay rent and slower to appreciate the value of their home.  Investors should understand the cost in time and dollars of managing a rental property.  Saving a few dollars in the short run by deferring maintenance items that are important to the tenant will cost an investor a quality tenant in the long run. 

Finally, investors should always be thinking about their exit strategy.  It is important to understand that value is created upfront.  Once an investor completes the cosmetic repairs and places the tenant, he/she should expect very little additional value creation because of the factors mentioned above.  Young investors looking to move up to bigger properties should look to quickly sell these types of properties to investors looking for stable, easy to manage cash flows.  By establishing a niche in this investment type, an investor could quickly obtain a stable of willing buyers and create a very profitable business model.